How to protect yourself and your wallet from the 'fiscal cliff'

Nov. 20, 2012: Federal Reserve Chairman Ben Bernanke addresses a luncheon gathering of The Economic Club of New York.
(AP)

Nov. 16, 2012: Senate Majority Leader Harry Reid of Nev., left, with House Speaker John Boehner of Ohio looking on, speaking to reporters outside the White House in Washington following a meeting with President Barack Obama to discuss the economy and the deficit.
(AP)

The election is over and Americans have chosen leaders almost certain to continue our nation’s disastrous fiscal policies. There is much clucking about whether lawmakers will act in the lame duck session to prevent the economy from going over what is everywhere described as a fiscal cliff.

I will make a prediction. A phony fix is in the works. Disaster will be averted—seemingly, temporarily. But for those who would minimize the impact of a coming economic collapse, personal financial changes must be made.

The fiscal cliff is itself the result of government’s interference in the private sector, destroying the climate necessary for solid economic growth. The federal tax code is a Frankenstein’s monster that picks winners and losers, rewards campaign contributors, and kills jobs. But the wealthy can never pay enough to satisfy the monster that has become the federal government. Given the deadlock between Congress and the President over the last few years, it seems that real reforms will wait.

Take a look at the way Europe has approached their own version of the fiscal cliff and you’ll see a clear pattern of extend and pretend, an endless string of bailouts and broken promises of austerity. Will our leaders find another way? Hint: the federal government has only lived within its means a total of eight years since WWII.

Without any agreement to avert the fiscal cliff before year’s end, nearly 90 percent of Americans will pay more taxes, according to the Tax Policy Center. Taxes would rise an average of about $3,500 per household as almost every tax cut enacted since 2001 would disappear. The impact of falling from the fiscal cliff could result in a drop of 0.5% in real gross domestic product, estimates the CBO. CNN Money reports that such a shift could cause unemployment to rise to 9.1 percent by the end of 2013.

Most politicians are leery of crushing their constituents with huge tax increases at the holidays. Therefore, most pundits expect some kind of deal will be reached. But those who believe the media and think they’re “safe” from financial harm should read the fine print.

Taxes have already been on the increase. In fact, the Wall Street Journal reported this week, “Individual income tax payments are now up $233 billion over the last two years, or 26%.” Part of the problem is that the “emergency” stimulus package added to the federal budget has now become a permanent fixture. This unchecked federal gluttony helps explain the $16 trillion dollar deficit, and the need for evermore revenue.

And still unpaid for in the federal budget is the looming beast of ObamaCare, which already is draining full time work from the economy as more and more employers keep permanent workforces below 50 employees or transition to a part-time workforce to avoid onerous penalties from the federal government. The one-two punch of an exploding federal budget and the employer-mandate of Obamacare will deliver a staggering blow to the economy and result in real job losses.

Writing for the Health Care Blog, John Goodman noted: “The law will require employers of workers earning $15 an hour or less to provide very expensive health insurance ($15,000 for a family) or pay a $2,000 fine. For these employees, the cost of family coverage is equal to more than half their income and there are no new subsides to help the employer or the employee bear this cost … We could see entire firms dissolve and recombine, just in response to health insurance subsidies, rather than based on economic considerations.”

For those who want to survive whatever course of action the politicians decide, here are steps you can take right now to protect yourself and your family:

• Check your deductibles. Expect the fiscal cliff fix to include more taxes. This is a good time to look at your withholding declarations to avoid giving the government a free loan that you will later celebrate as a “bonus” when you receive your refund.

• Review your health care status. Under pressure from Obamacare, it is very possible that companies could choose to pay a fine rather than provide insurance or to reduce hours to lower the number of fulltime employees. They won’t do this because they’re “evil,” but because they’re trying to survive. Get to know the healthcare market so that if you need to purchase individual health insurance, you’re ready.

• Decrease your expenses. It’s clear that given Uncle Sam’s voracious appetite for other people’s money, you will find the rising cost of necessities (under pressure from rising energy prices, increased taxes and healthcare costs) will impact all budgets. Already retailers, especially in the food industry, are talking about price increases. Begin planning today to cover those costs.

• Downsize your debt. As the Bible says, “the borrower is servant to the lender.” Free yourself from the burden of debt to give yourself flexibility and more financial margin to adapt to changes in this economy.

• Diversify your income sources. About 50 percent of the global workforce is part-time. This trend will hit the U.S. as more companies are forced to cover the costs of healthcare. Multiple income streams are a hedge against losing a single full-time job. Consider a home-based business to supplement your income.

• Diversify your investments. Too many people rely largely on the stock market for their investments, unconcerned that they have 100% of their money in equities. Investments can be made in many forms, including bonds, real estate, currencies, and commodities. This is a timeless hedge against volatility.

• Plan for charitable giving. With so many Americans hurting, consider how much more you can give and what you can do to ease the suffering of your fellow Americans. This will also reduce the amount you must pay in taxes.

• Begin a budget (if you haven’t already). Many tools are available for those who want to try planning to survive and thrive, no matter the economy. Crown is a good place to start to strengthen your finances for the turbulence ahead.

The biggest mistake people can make in an uncertain economy is to fail to prepare. Rather than watching and waiting to see what the government will do, reduce your uncertainty and anxiety by taking corrective action now.

Chuck Bentley is CEO of Crown, a non-profit business and personal finance policy and educational organization, and author of "The S.A.L.T. Plan. How to Prepare for an Economic Crisis of Biblical Proportions" and "Root of Riches, What if everything you think about money is wrong?"